Minova clouds Orica outlook

Incoming
Orica
chief executive Ian Smith has the good fortune to take over when demand for the company’s explosives and chemical products has recovered and the business is performing soundly.

But he faces a tough decision on whether to persist with the Minova mining consumables business, a big-ticket acquisition that continues to disappoint.

Orica’s current chief executive,
Graeme Liebelt
, who will hand over to Mr Smith at the end of February, delivered his final set of full-year accounts yesterday after six years in the job.

They showed net profit of $663.4 million for the 12 months to September 30, a 51.3 per cent year-on-year decline. The previous year’s result, however, included a substantial profit on the demerger of the DuluxGroup paints business.

Excluding one-off items, Orica’s 2011 net profit was $642 million, 4 per cent up on the previous year and ahead of analyst expectations.

The company’s shares rose $1.11 yesterday to close at $25.41. The S&P/ASX 200 was down 7.7 points.

The profit improvement was driven by a record result in Orica’s largest division, mining services, which supplies explosives to the mining industry.

With sales volumes strengthening and improved productivity, the division reported a 6 per cent increase in earnings before interest and tax to $817 million.

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Minova, on the other hand, reported a 19 per cent fall in EBIT to $105 million as strong competition, particularly in North America, squeezed margins.

Based on the expectation that Minova had “bottomed out" in the second half of last financial year, Mr Liebelt expected Orica would continue with the business.

“If, however, it went backwards and we formed the view that we couldn’t turn it around, then the board might take a different decision," he said. “But I hasten to add that we’re not at that point yet."

Analysts have raised the prospect that the company may at some point write down the book value of Minova, which is understood to be about $1.5 billion.

Mr Liebelt maintained that a long-term growth rate of 3 per cent was required to support that valuation, but Mr Smith’s arrival could see a change in viewpoint.

“New MD 101 is always write down the things that are underperforming so I think that will be an issue for Smith," one analyst said.

Orica gave its usual non-specific guidance yesterday that it expected further earnings growth this financial year, subject to global economic conditions.

The company will be helped by the imminent re-start of the Kooragang Island ammonia plant near Newcastle, NSW.

The facility was shut down in August after it was found that a small amount of hexavalent chromium, a potentially cancer-causing chemical, had leaked into the atmosphere.

Its closure is estimated to have cost the company $21 million up to the end of September, due to the need to secure an alternative supply of ammonia.

Mr Liebelt was hopeful the plant would be ready to restart production in the next few weeks.

Orica declared a fully franked final dividend of 53¢ , down from 54¢ last year.